Issue 33 (March 2020)
Dear members,Financial reporting implications of coronavirusThe current outbreak of coronavirus (COVID-19) has significantly affected entities andeconomic activity in Hong Kong and the broader region.This publication considers HKAS 10 Events after the Reporting Period and relatedHKFRS financial reporting implications of coronavirus. In particular, it considerswhether the spread of COVID-19 should be accounted for as an adjusting ornon-adjusting event.This publication is designed for reporting periods ending 31 December 2019; however,the principles it discusses are relevant for all reporting periods.BackgroundOn 31 December 2019, the World Health Organisation was informed that a limitednumber of cases of pneumonia, of an unknown cause, were detected in Wuhan,Hubei. On 7 January 2020, Chinese authorities identified a new type of coronavirus(COVID-19) as the cause. The first cases of COVID-19 were confirmed in Hong Kongon 23 January 2020.Since 31 December 2019, the development and spread of COVID-19 has resulted inthe occurrence of a multitude of associated events. Among these are the identificationof the virus, its spread in terms of number of infected and geographical prevalence,actions taken by governments and non-governmental organisations, actions taken byprivate entities, and the resulting economic effects of these.HKAS 10 analysisHKAS 10 defines events after the reporting period as those events, favourable andunfavourable, that occur between the end of the reporting period and the date whenthe financial statements are authorised for issue. There are two types of events:
(a) those that provide evidence of conditions that existed at the end of thereporting period (adjusting events after the reporting period); and(b) those that are indicative of conditions that arose after the reporting period(non-adjusting events after the reporting period).The conditions that existed at the end of the reporting period (assumed to be 31December 2019 throughout this guidance) were that a limited number of cases ofpneumonia, of an unknown cause, had been detected in Wuhan, and that thisinformation was communicated to the World Health Organisation.In assessing whether events associated with the development and spread ofCOVID-19 are adjusting or non-adjusting events after the reporting period, entitiesshould exercise judgement and carefully consider their individual facts andcircumstances. In our view, the development and spread of COVID-19 (and multitudeof associated events) subsequent to the reporting date generally do not provideevidence of conditions that existed at 31 December 2019, as described above. Rather,the development and spread of COVID-19 generally evidences conditions that aroseafter the reporting date. Entities should consider that:
•The increase in transmission and geographical spread of COVID-19 largelyoccurred after the reporting period, as at 31 December 2019 there were only alimited number of cases concentrated in Wuhan, Hubei. When a new host isinfected with COVID-19, that infection is a new condition to that host.•Actions (e.g. travel restrictions and quarantine measures) taken bygovernments, non-governmental organisations, and private entities in relationto COVID-19, which are publicly knowable and could reasonably have beendeemed to affect an entity’s financial statements, have substantially alloccurred after the reporting period.•Resultant economic effects related to COVID-19 have largely arisen as aresult of events that have taken place after the reporting period, such as thoselisted above.Therefore, the events resulting from the development and spread of COVID-19 after31 December 2019 should generally be accounted for as non-adjusting events.Accounting and disclosures for COVID-19The outbreak of COVID-19 and its associated events subsequent to the reporting dateof 31 December 2019 should generally be accounted for as non-adjusting eventsunder HKAS 10. Per HKAS 10, paragraph 10, an entity shall not adjust the amountsrecognised in its financial statements to reflect non-adjusting events after thereporting period.However, per HKAS 10, paragraph 21, an entity shall disclose non-adjusting events ifthey are material. This disclosure should include, for each material category ofnon-adjusting event, the nature of the event and an estimate of its financial effect.It may be difficult to estimate the financial effect attributable to COVID-19. If anestimate of the financial effect cannot be made for disclosure purposes, HKAS 10requires a statement that such an estimate cannot be made.Entities should also note the requirements in HKAS 1 Presentation of FinancialStatements, paragraph 122, to disclose judgements made in the process of applyingthe entity’s accounting policies, and HKAS 1, paragraph 125, to disclose informationabout sources of estimation uncertainty.Impact of other events beyond the scope of COVID-19The events associated with the development and spread of COVID-19 shouldgenerally be considered non-adjusting events. However, management should alsoconsider whether there are other events beyond the scope of COVID-19 that provideevidence of conditions that existed at the end of the reporting period (adjustingevents).An example of an event after the reporting period is a sale of inventories at a sellingprice below cost, which provides evidence about a decrease in net realisable value.An entity applies judgement to determine which events contributed to the decrease,and determine whether those events evidence circumstances that existed at the endof the reporting period. For example, if management determines that inventories haddecreased in value due to obsolescence unrelated to COVID-19, and the condition ofobsolescence existed before the reporting date, this indicates presence of anadjusting event. Management would then need to consider how much of the decreasein net realisable value relates to the obsolescence event. [Refer: HKAS 10, paragraph9(b)]During this time, it may be challenging to determine which events have caused animpact to an entity’s financial reporting, and to measure their impact independentlyfrom the overall non-adjusting impact of COVID-19. Entities should carefully exercisejudgement and consider the specific facts and circumstances to achieve fairpresentation and compliance with HKFRSs.Other relevant considerationsGoing concernCOVID-19 has had a significantly unfavourable impact on some entities. Regardlessof whether an event after the reporting period is adjusting or non-adjusting,management should assess and make a determination of the entity’s ability tocontinue as a going concern when preparing its financial statements. For the purposeof this assessment, management should consider the impact that the outbreak ofCOVID-19 and its associated events, which have occurred since 31 December 2019,has had on the entity. In particular, management should consider whether events afterthe reporting period related to COVID-19 have resulted in a need to consider whetherthe going concern assumption is still appropriate, and whether there are materialuncertainties that may cast significant doubt on the ability to continue as a goingconcern.In general, financial statements should be prepared on a going concern basis unlessmanagement determines it intends to liquidate the entity or to cease trading, or that ithas no realistic alternative not to do so. Information that management should take intoaccount when determining whether the going concern assumption is still appropriateincludes:
•All available information about the future at least (but not limited to) twelvemonths from the end of the reporting period.•History of operations and access to financial resources.•Depending on the circumstances, a wide range of factors relating to currentand expected profitability, debt repayment schedules and potential sources ofreplacement financing.Entities should refer to HKAS 1, paragraphs 25-26, and HKAS 10, paragraphs 14-16,for the going concern requirements.Accounting in event that the entity is no longer a going concern (or there is significantdoubt)
If it is determined that the going concern assumption is no longer appropriate, HKAS10 requires a fundamental change to the basis of accounting. In this event, as HKFRSdoes not specify the basis of accounting to change to, entities will need to carefullyassess their situation and circumstances.Additionally, HKAS 1 requires disclosures in the event that either:
•An entity does not prepare financial statements on a going concern basis.•Management is aware of material uncertainties related to events or conditionsthat may cast significant doubt on the entity’s ability to continue as a goingconcern. These events or conditions may arise after the reporting period.Entities should refer to HKAS 1, paragraph 25, for the disclosure requirements, andIFRS Interpretations Committee agenda decisions in IFRIC Update July 2010 (whichexplains that applying the disclosure requirements requires the exercise ofprofessional judgment), and IFRIC Update July 2014 (which explains that paragraph122 of HKAS 1 applies to judgements made in concluding there are no materialuncertainties related to events or conditions that may cast significant doubt on theentity’s ability to continue as a going concern) for implementation guidance1.Interim reporting considerationsAs uncertainty persists about the economic impact of COVID-19, entities should bearin mind that the overall requirements of HKAS 1 in respect to going concern apply toboth a complete set of financial statements and condensed interim financialstatements. The requirement in HKAS 1 to consider all available future informationtwelve months from the end of the reporting period, noted above, also applies fromthe end of the interim reporting date.Estimates and measurements under other StandardsGiven that the outbreak of COVID-19 and its associated events after 31 December2019 are generally non-adjusting, entities should carefully consider estimates used atthe reporting date to ensure they only reflect conditions that existed at the end of thereporting period, and do not introduce hindsight into those measurements.Entities should pay careful attention to the above in respect of any areas where suchestimates need to be made, including but not limited to:
•HKAS 2 Inventories: The measurement of net realisable value of inventory.•HKAS 16 Property, Plant and Equipment: The determination of remaininguseful life and residual value of assets.https://cdn.ifrs.org/-/media/feature/supporting-implementation/agenda-decisions/ias-1-going-concern-disclosure-july-2010.pdf.https://cdn.ifrs.org/-/media/feature/supporting-implementation/agenda-decisions/ias-1-disclosure-requirements-relating-to-assessment-of-going-concern-jul-14.pdf.•HKAS 36 Impairment of Assets: The measurement of recoverable amountsand assessing whether an indication of impairment exists for non-financialassets.•HKAS 37 Provisions, Contingent Liabilities and Contingent Assets: Themeasurement of liabilities including provisions for onerous contracts.•HKFRS 4 Insurance Contracts: The measurement of insurance contractliabilities.•HKFRS 9 Financial Instruments: The measurement of expected credit losses,which should reflect a probability-weighted estimate of credit losses based oninformation available at the reporting date. This consideration is alsoapplicable to financial guarantee contracts not measured at fair value throughprofit or loss.•HKFRS 13 Fair Value Measurement: The fair value measurement of assetsand liabilities, which should reflect current market conditions, and theassumptions of market participants, as of the measurement date.Sincere regards,Chris JoyExecutive DirectorHong Kong Institute of Certified Public AccountantsCPA: The Success Ingredientwww.hkicpa.org.hkConnect with usDisclaimerThis guidance was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA)
and is for general reference only. The HKICPA, FRSC and their staff do notaccept any responsibility or liability, and disclaim all responsibility and liability,in respect of the guidance and any consequences that may arise from anyperson acting or refraining from action as a result of any materials in theguidance. Members of the HKICPA and other users of this guidance should alsoread the full Standard, as found in the HKICPA Members’ Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback,which should be sent to commentletters@hkicpa.org.hk.
Financial Reporting, Auditing and Ethics Alert Issue 33: Financial reporting implications of coronavirus
下载原件Issue 33 (March 2020)
Dear members,Financial reporting implications of coronavirusThe current outbreak of coronavirus (COVID-19) has significantly affected entities andeconomic activity in Hong Kong and the broader region.This publication considers HKAS 10 Events after the Reporting Period and relatedHKFRS financial reporting implications of coronavirus. In particular, it considerswhether the spread of COVID-19 should be accounted for as an adjusting ornon-adjusting event.This publication is designed for reporting periods ending 31 December 2019; however,the principles it discusses are relevant for all reporting periods.BackgroundOn 31 December 2019, the World Health Organisation was informed that a limitednumber of cases of pneumonia, of an unknown cause, were detected in Wuhan,Hubei. On 7 January 2020, Chinese authorities identified a new type of coronavirus(COVID-19) as the cause. The first cases of COVID-19 were confirmed in Hong Kongon 23 January 2020.Since 31 December 2019, the development and spread of COVID-19 has resulted inthe occurrence of a multitude of associated events. Among these are the identificationof the virus, its spread in terms of number of infected and geographical prevalence,actions taken by governments and non-governmental organisations, actions taken byprivate entities, and the resulting economic effects of these.HKAS 10 analysisHKAS 10 defines events after the reporting period as those events, favourable andunfavourable, that occur between the end of the reporting period and the date whenthe financial statements are authorised for issue. There are two types of events:
(a) those that provide evidence of conditions that existed at the end of thereporting period (adjusting events after the reporting period); and(b) those that are indicative of conditions that arose after the reporting period(non-adjusting events after the reporting period).The conditions that existed at the end of the reporting period (assumed to be 31December 2019 throughout this guidance) were that a limited number of cases ofpneumonia, of an unknown cause, had been detected in Wuhan, and that thisinformation was communicated to the World Health Organisation.In assessing whether events associated with the development and spread ofCOVID-19 are adjusting or non-adjusting events after the reporting period, entitiesshould exercise judgement and carefully consider their individual facts andcircumstances. In our view, the development and spread of COVID-19 (and multitudeof associated events) subsequent to the reporting date generally do not provideevidence of conditions that existed at 31 December 2019, as described above. Rather,the development and spread of COVID-19 generally evidences conditions that aroseafter the reporting date. Entities should consider that:
•The increase in transmission and geographical spread of COVID-19 largelyoccurred after the reporting period, as at 31 December 2019 there were only alimited number of cases concentrated in Wuhan, Hubei. When a new host isinfected with COVID-19, that infection is a new condition to that host.•Actions (e.g. travel restrictions and quarantine measures) taken bygovernments, non-governmental organisations, and private entities in relationto COVID-19, which are publicly knowable and could reasonably have beendeemed to affect an entity’s financial statements, have substantially alloccurred after the reporting period.•Resultant economic effects related to COVID-19 have largely arisen as aresult of events that have taken place after the reporting period, such as thoselisted above.Therefore, the events resulting from the development and spread of COVID-19 after31 December 2019 should generally be accounted for as non-adjusting events.Accounting and disclosures for COVID-19The outbreak of COVID-19 and its associated events subsequent to the reporting dateof 31 December 2019 should generally be accounted for as non-adjusting eventsunder HKAS 10. Per HKAS 10, paragraph 10, an entity shall not adjust the amountsrecognised in its financial statements to reflect non-adjusting events after thereporting period.However, per HKAS 10, paragraph 21, an entity shall disclose non-adjusting events ifthey are material. This disclosure should include, for each material category ofnon-adjusting event, the nature of the event and an estimate of its financial effect.It may be difficult to estimate the financial effect attributable to COVID-19. If anestimate of the financial effect cannot be made for disclosure purposes, HKAS 10requires a statement that such an estimate cannot be made.Entities should also note the requirements in HKAS 1 Presentation of FinancialStatements, paragraph 122, to disclose judgements made in the process of applyingthe entity’s accounting policies, and HKAS 1, paragraph 125, to disclose informationabout sources of estimation uncertainty.Impact of other events beyond the scope of COVID-19The events associated with the development and spread of COVID-19 shouldgenerally be considered non-adjusting events. However, management should alsoconsider whether there are other events beyond the scope of COVID-19 that provideevidence of conditions that existed at the end of the reporting period (adjustingevents).An example of an event after the reporting period is a sale of inventories at a sellingprice below cost, which provides evidence about a decrease in net realisable value.An entity applies judgement to determine which events contributed to the decrease,and determine whether those events evidence circumstances that existed at the endof the reporting period. For example, if management determines that inventories haddecreased in value due to obsolescence unrelated to COVID-19, and the condition ofobsolescence existed before the reporting date, this indicates presence of anadjusting event. Management would then need to consider how much of the decreasein net realisable value relates to the obsolescence event. [Refer: HKAS 10, paragraph9(b)]During this time, it may be challenging to determine which events have caused animpact to an entity’s financial reporting, and to measure their impact independentlyfrom the overall non-adjusting impact of COVID-19. Entities should carefully exercisejudgement and consider the specific facts and circumstances to achieve fairpresentation and compliance with HKFRSs.Other relevant considerationsGoing concernCOVID-19 has had a significantly unfavourable impact on some entities. Regardlessof whether an event after the reporting period is adjusting or non-adjusting,management should assess and make a determination of the entity’s ability tocontinue as a going concern when preparing its financial statements. For the purposeof this assessment, management should consider the impact that the outbreak ofCOVID-19 and its associated events, which have occurred since 31 December 2019,has had on the entity. In particular, management should consider whether events afterthe reporting period related to COVID-19 have resulted in a need to consider whetherthe going concern assumption is still appropriate, and whether there are materialuncertainties that may cast significant doubt on the ability to continue as a goingconcern.In general, financial statements should be prepared on a going concern basis unlessmanagement determines it intends to liquidate the entity or to cease trading, or that ithas no realistic alternative not to do so. Information that management should take intoaccount when determining whether the going concern assumption is still appropriateincludes:
•All available information about the future at least (but not limited to) twelvemonths from the end of the reporting period.•History of operations and access to financial resources.•Depending on the circumstances, a wide range of factors relating to currentand expected profitability, debt repayment schedules and potential sources ofreplacement financing.Entities should refer to HKAS 1, paragraphs 25-26, and HKAS 10, paragraphs 14-16,for the going concern requirements.Accounting in event that the entity is no longer a going concern (or there is significantdoubt)
If it is determined that the going concern assumption is no longer appropriate, HKAS10 requires a fundamental change to the basis of accounting. In this event, as HKFRSdoes not specify the basis of accounting to change to, entities will need to carefullyassess their situation and circumstances.Additionally, HKAS 1 requires disclosures in the event that either:
•An entity does not prepare financial statements on a going concern basis.•Management is aware of material uncertainties related to events or conditionsthat may cast significant doubt on the entity’s ability to continue as a goingconcern. These events or conditions may arise after the reporting period.Entities should refer to HKAS 1, paragraph 25, for the disclosure requirements, andIFRS Interpretations Committee agenda decisions in IFRIC Update July 2010 (whichexplains that applying the disclosure requirements requires the exercise ofprofessional judgment), and IFRIC Update July 2014 (which explains that paragraph122 of HKAS 1 applies to judgements made in concluding there are no materialuncertainties related to events or conditions that may cast significant doubt on theentity’s ability to continue as a going concern) for implementation guidance1.Interim reporting considerationsAs uncertainty persists about the economic impact of COVID-19, entities should bearin mind that the overall requirements of HKAS 1 in respect to going concern apply toboth a complete set of financial statements and condensed interim financialstatements. The requirement in HKAS 1 to consider all available future informationtwelve months from the end of the reporting period, noted above, also applies fromthe end of the interim reporting date.Estimates and measurements under other StandardsGiven that the outbreak of COVID-19 and its associated events after 31 December2019 are generally non-adjusting, entities should carefully consider estimates used atthe reporting date to ensure they only reflect conditions that existed at the end of thereporting period, and do not introduce hindsight into those measurements.Entities should pay careful attention to the above in respect of any areas where suchestimates need to be made, including but not limited to:
•HKAS 2 Inventories: The measurement of net realisable value of inventory.•HKAS 16 Property, Plant and Equipment: The determination of remaininguseful life and residual value of assets.https://cdn.ifrs.org/-/media/feature/supporting-implementation/agenda-decisions/ias-1-going-concern-disclosure-july-2010.pdf.https://cdn.ifrs.org/-/media/feature/supporting-implementation/agenda-decisions/ias-1-disclosure-requirements-relating-to-assessment-of-going-concern-jul-14.pdf.•HKAS 36 Impairment of Assets: The measurement of recoverable amountsand assessing whether an indication of impairment exists for non-financialassets.•HKAS 37 Provisions, Contingent Liabilities and Contingent Assets: Themeasurement of liabilities including provisions for onerous contracts.•HKFRS 4 Insurance Contracts: The measurement of insurance contractliabilities.•HKFRS 9 Financial Instruments: The measurement of expected credit losses,which should reflect a probability-weighted estimate of credit losses based oninformation available at the reporting date. This consideration is alsoapplicable to financial guarantee contracts not measured at fair value throughprofit or loss.•HKFRS 13 Fair Value Measurement: The fair value measurement of assetsand liabilities, which should reflect current market conditions, and theassumptions of market participants, as of the measurement date.Sincere regards,Chris JoyExecutive DirectorHong Kong Institute of Certified Public AccountantsCPA: The Success Ingredientwww.hkicpa.org.hkConnect with usDisclaimerThis guidance was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA)
and is for general reference only. The HKICPA, FRSC and their staff do notaccept any responsibility or liability, and disclaim all responsibility and liability,in respect of the guidance and any consequences that may arise from anyperson acting or refraining from action as a result of any materials in theguidance. Members of the HKICPA and other users of this guidance should alsoread the full Standard, as found in the HKICPA Members’ Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback,which should be sent to commentletters@hkicpa.org.hk.